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Chinese Stocks Are Fading, and the Chinese Government Is to Blame

Having enjoyed a taste of true wealth, the Chinese are pointing fingers at their leadership

By Josh Enomoto, InvestorPlace Contributor

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Chinese Stocks Are Fading, and the Chinese Government Is to Blame

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For several years, Chinese stocks symbolized the thinking person’s investment category. Primarily, the Asian juggernaut’s demographics made the entire sector impossible to ignore. For instance, because of China’s massive population, Chinese is the most spoken language in the world.

That statistic alone has significant implications for Chinese stocks like Baidu (NASDAQ:BIDU). As I mentioned back in June, China’s population won’t peak until approximately 2030.

This is significant time for its internet users to shape the world wide web more to their preferences. Based on global demographics, the language of the internet will become Chinese, which boosts BIDU stock for the long term. Even American internet firms like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) will have to adjust to this paradigm shift.

But broadly speaking, Chinese stocks have suffered a frustrating year in 2018. A prime example is the benchmark exchange-traded fund iShares China Large-Cap ETF (NYSEARCA:FXI). After skyrocketing briefly in January, FXI floundered for several months before collapsing.

The recent downfall in Chinese stocks has an obvious catalyst, or culprit depending on your perspective. President Trump has long criticized China and its economic and monetary policies. That animosity took on greater significance when Trump accused Chinese companies of stealing American intellectual property and compromising our security.

What started off as a threat eventually became a full-fledged trade war. Our administration slapped billions of dollars worth of tariffs, and China responded in kind. Neither side appears willing to back down, adding even more pressure to Chinese stocks.

And while both nations are suffering economically, we are almost surely likely to emerge victorious.

Decline in Chinese Stocks Proves Trump Is Winning

I’m not saying anything new when I note that President Trump is an unpopular leader. Tune into any news network not named Fox News, and you’ll hear a barrage of criticism. I would argue some of them are fair points.

But when it comes to his claims about “winning,” I must give credit where it’s due. With China, he’s doing exactly that.

For starters, look at Chinese stocks and compare them to our own. The aforementioned FXI is down more than 10% year-to-date. The gains for the SPDR S&P 500 ETF (NYSEARCA:SPY) are still pedestrian, but it is up a respectable 7%.

Additionally, the majority of large Chinese stocks, such as Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY), are seeing red ink. BABA stock is down 2% for the year, while TCEHY stock has hemorrhaged nearly 18%.

However, the decline is much more than just declining investor sentiment. As The New York Times recently declared, President Trump has rattled China’s leaders.

This news shouldn’t be taken lightly. In prior economic conflicts with China, their leadership could rely on massive cash reserves to hold them over. Regarding public dissent, well, the communist government has always dealt with that directly and oftentimes brutally.

But now, Chinese criticism is pouring in, giving government censors more work than they can handle. More significantly, that criticism isn’t just focused on “American imperialism,” but rather, against Chinese President Xi Jinping.

Although a remarkable development, it’s not surprising. For the first time, the average Chinese worker has experienced significant wealth. Something like that is hard to give up. You’ll do anything to keep it, ignoring even nationalistic sentiment.

For Americans, we’ve been there and done that. Having suffered multiple recessions, we know how to keep our composure. You really can’t say that about the Chinese.

Expect “Yuge” Political Fallout in China

If you listen to left-leaning news, you’ll hear pundits slam Trump’s foreign policy as damaging to our interests. And again, many of these criticisms are valid. But when it comes to the ongoing trade war, it’s China that will absorb the most damage.

As I previously mentioned, this is the first time most Chinese people received a taste of the good life. Their concern isn’t about the proletariat’s struggle against the bourgeoisie. It’s about whether BABA stock or BIDU stock can deliver returns for their portfolio.

Nothing speaks louder than money. And nothing screams louder than losing money. If you take a cursory look at Chinese stocks, you’ll know that a lot of money is being lost. That more than any political or nationalistic concern drives Chinese public dissent.

Of course, China still has its massive cash reserves. The government is still willing to suppress public criticism sharply. However, the communist party’s leverage has faded.

It turns out, while people still fear draconian government oversight, they dread a loss of their newfound fortunes even more.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/chinese-stocks-are-fading-and-the-chinese-government-is-to-blame/.

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